Activity-Based Costing Versus Traditional Approach.

Carson Company produces a regular computer monitor that sells for $175 and a premium computer monitor that sells for $300. Last year, total overhead costs of $3,675,000 were allocated based on direct labour hours. A total of 63,000 direct labour hours were required last year to build 36,000 regular monitors (1.75 hours per unit), and 42,000 direct labour hours were required to build 12,000 premium monitors (3.50 hours per unit). Total direct labour and direct materials costs for last year were as follows:

	Regular Monitor	Premium Monitor
Direct materials	$1,908,000	$ 900,000
Direct labour	$1,728,000	$1,200,000

The management of Carson Company would like to use activity-based costing to allocate overhead rather than one plant-wide rate based on direct labour hours. The following estimates are for the activities and related cost drivers identified as having the greatest impact on overhead costs:

				Estimated Cost Driver Activity
Activity	Cost Driver		Estimated Overhead Costs	Regular	Premium	Total
Purchase orders	Number of purchase orders	$	1,200,000	400	600	1,000
Production setups	Number of setups		1,125,000	120	30	150
Quality inspections	Inspection hours		750,000	3,600	8,400	12,000
Packaging and shipping	Number of units shipped		600,000	36,000	12,000	48,000
Total		$	3,675,000

Required:

1. Calculate the direct materials cost per unit and direct labour cost per unit for each product.
3. 1. Using the plant-wide allocation method, calculate the predetermined overhead rate and determine the overhead cost per unit allocated to the regular and premium monitors.
   2. Using the plant-wide allocation method, calculate the product cost per unit for the regular and premium monitors. Round results to the nearest cent.

1. 1. Using the activity-based costing allocation method, calculate the predetermined overhead rate for each activity. (Hint: Step 1 through step 3 in the activity-based costing process have already been done for you; this is step 4.) Round results to the nearest cent.
   2. Using the activity-based costing allocation method, allocate overhead to each product. (Hint: This is step 5 in the activity-based costing process.) Determine the overhead cost per unit. Round results to the nearest dollar.
   3. What is the product cost per unit for the regular and premium monitors?

1. Calculate the per unit profit for each product using the plant-wide approach and the activity-based costing approach.
2. How much did the profit per unit change for each product when moving from the plant-wide approach to the activity-based costing approach? What caused this change?